Under the second draft of Arizona’s medical marijuana rules issued by Arizona Department of Health Services on January 31, 2011, DHS proposes to select dispensary registration certificates (aka dispensary licenses) by a lottery.  The rules divides Arizona into 126 zones called Community Health Analysis Areas (CHAAs).  DHS will allow one dispensary in each CHAA.  Currently there will be 125 possible dispensaries so one CHAA may not have a dispensary.

DHS will begin accepting applications for dispensary registration certificates for thirty days on May 1, 2011.  On June 30, 2011, DHS will award dispensary registration certificates as follows:

  • If a CHAA has only one qualified application for a dispensary registration certificate, that applicant will be awarded the certificate.
  • If a CHAA has more than one qualified application for a dispensary registration certificate, DHS will conduct a lottery and the winner will be awarded the certificate.

DHS has created a new Arizona lottery.  Here is how the new lottery works.  Pay $5,000 and take a chance your chit will be pulled out of a hat.  If your number is picked, you will win a really big valuable prize, i.e., a state authorized monopoly to make money.

How can DHS unilaterally create a new Arizona lottery.  I thought legalized gambling in Arizona had to be authorized by a law passed by the legislature and signed by the governor.  Apparently I am wrong.

Arizona Revised Statutes Section 13-3301.1 states:

“Gambling” or “gamble” means one act of risking or giving something of value [$5,000] for the opportunity to obtain a benefit [a dispensary registration certificate] from a game or contest of chance [the lottery conducted by DHS for a dispensary registration certificate] or skill or a future contingent event but does not include bona fide business transactions which are valid under the law of contracts including contracts for the purchase or sale at a future date of securities or commodities, contracts of indemnity or guarantee and life, health or accident insurance.”

I submit that DHS process does not involve a contract.  There will not be any contract between the applicants and DHS so the contract exception will not apply.

Arizona Revised Statutes Section 13-3303 states:

A. Except for amusement, regulated or social gambling, a person commits promotion of gambling if he knowingly does either of the following for a benefit [a dispensary registration certificate] . . . Conducts, organizes, manages, directs, supervises or finances gambling.

B. Promotion of gambling is a class 5 felony.

Is the DHS lottery exempt from Section 13-3303 and therefore not illegal under Arizona law because it is amusement, regulated or social gambling as defined in Section 13-3301?  It is clear to me that the DHS lottery is not amusement or social gambling.  DHS would probably claim its lottery is regulated gambling, which is defined in Section 13-3301 as:

Regulated gambling” means either:(a) Gambling conducted in accordance with a tribal-state gaming compact or otherwise in accordance with the requirements of the Indian gaming regulatory act of 1988 (P.L. 100-497; 102 Stat. 2467; 25 United States Code sections 2701 through 2721 and 18 United States Code sections 1166 through 1168); or

(b) Gambling to which all of the following apply:

(i) It is operated and controlled in accordance with a statute, rule or order of this state or of the United States.

(ii) All federal, state or local taxes, fees and charges in lieu of taxes have been paid by the authorized person or entity on any activity arising out of or in connection with the gambling.

(iii) If conducted by an organization which is exempt from taxation of income under section 43-1201, the organization’s records are open to public inspection.

(iv) Beginning on June 1, 2003, none of the players is under twenty-one years of age.

Conclusion:  The DHS rules that create a lottery to select dispensary registration certificates is legalized gambling because it appears to be regulated gambling, which is exempt from the criminal prohibition on gambling set forth in Section 13-3303.  Given the public interest in the lottery and the high value of the prizes to be awarded to the sweepstakes winners, DHS should make public the lottery procedures and televise every drawing to avoid the appearance of impropriety and actual impropriety.